As we look ahead to 2025, the M&A landscape in the behavioral health sector is showing signs of a rebound. Recent data released by PricewaterhouseCoopers (PwC) indicates that dealmaking in behavioral health was up by 35% in the first quarter of the year. This increase is a positive sign for the industry, with PwC predicting that the pace of M&A activity will remain active in the second half of the year due to growing investor interest.
One of the key drivers of this increased activity has been autism deals, which reached their highest quarterly volume since 2020. Additionally, there has been a surge in interest in addiction treatment and outpatient psychiatric platforms in the first half of the year.
Despite some sectors within the health care industry pausing or revisiting deals earlier in the year, behavioral health has remained a hot subsector for dealmaking. According to the report, investors, particularly private equity firms, are actively pursuing a roll-up strategy in behavioral health due to the strong demand in the sector.
Private equity dealmakers are focusing on health care platforms and tech-enabled services, with a trend towards holding investments longer and taking a more disciplined approach to mitigate risk and preserve capital. Even though there has been a 7% decline in mergers and acquisitions compared to the previous year, deal volume in the health care sector remains resilient.
The health care industry is facing challenges from a complex macroeconomic and political environment, which is expected to continue influencing deal activity. Uncertainties around Medicaid cuts and other pending federal policies are factors that dealmakers need to navigate in their decision-making processes.
Despite these policy headwinds, value-based care remains an attractive factor in health care deals. Investors are leaning towards light-risk providers over full-risk providers, but there may be new investment opportunities arising from a downturn in risk-based provider performance.
Investors are adapting to the current market conditions by exploring new deal structures, driven by high interest rates and longer holding times in the health care sector. Prioritizing minority recaps and preferred equity can help bridge valuation gaps and ensure a steady flow of deals in the industry.
